Leading economist outlines ‘property crash’ indicators

A chief economist believes the Australian housing sector is “vulnerable” but a property crash looks unlikely in the absence of higher interest rates.

In a market update, AMP Capital chief economist Shane Oliver noted that very expensive housing and high household debt leave Australian housing “vulnerable”.

“However, in the absence of either a recession or much higher interest rates, a property crash looks unlikely,” Mr Oliver said.

“The Sydney and Melbourne property markets are likely to slow further this year and have another cyclical five to 10 per cent price downswing around 2017-18.”

Addressing recent crash predictions of the Australian property market, Mr Oliver highlighted that the main reason for the persistent “over-valuation” of home prices relative to other countries is constrained supply.

Until recently, Australia had a chronic undersupply of more than 100,000 dwellings.

“Completions are at record levels but they are just catching up with the undersupply of prior years,” Mr Oliver said.

“Secondly, Australia has not seen anything like the deterioration in lending standards other countries saw prior to the GFC,” he said.

“There has been no growth in so-called low doc and subprime loans which were central to the US housing crisis. In fact, in recent years there has been a decline in low doc loans and a reduction in loans with high loan to valuation ratios.”

To see a property crash or prices fall by an average of 20 per cent or more, Mr Oliver said three things need to occur. Firstly, a recession, where higher unemployment could cause debt servicing problems.

“At this stage a recession looks unlikely though,” he said.

Secondly, a property price crash would require a surge in interest rates. “But the RBA is not stupid,” Mr Oliver said, “It knows households are now more sensitive to higher rates.”

Finally, an oversupply of properties could spark a housing crash. While this remains a risk, Mr Oliver said it would require the current construction boom to continue for several years.

AMP Capital’s assessment is that the boom in Sydney and Melbourne is slowing, thanks in large part to APRA’s measures to slow lending to property investors.

“Price growth is likely to remain negative in Perth and Darwin as the mining boom continues to unwind. Hobart and Adelaide are likely to see continued moderate property growth, but Brisbane may pick up a bit. Nationwide price falls are unlikely until the RBA starts to raise interest rates and this is unlikely before 2017.

In the absence of a recession or rapid interest rate hikes, Mr Oliver predicts price falls are more likely to be five to 10 per cent as was seen in the 2009 and 2011 down cycles.